Are foreign buyers driving up Australian property prices?
We provide an overview of what's causing the boom in our property prices.
The Australian property market has experienced a price surge in parts of Sydney and Melbourne which has led some SMSF investors to speculate that the property market is ‘bubbly’ and that some properties are overvalued.
We spoke to Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital about whether international buyers are contributing to this overvaluation and whether they are artificially inflating property prices. We also ask if the lower Australian dollar will impact on the value of Australian properties.
Q: Are foreign investors to blame for Australia’s high property prices?
No. Australia's property prices are high relative to income and rents because the supply of homes has simply not kept up with the demand driven by population growth. Every so often, prices get another push along by lower interest rates as is the case in Sydney and Melbourne at the moment. As a result, mortgage lending to Australians has surged – particularly in recent times to investors.
Foreign buying has played a role in pushing property prices higher, but it’s really just a sideshow compared to what’s happening in the Australian market. International investment only accounts for about 10% of total buying value. This tends to be in middle to upper end property–mainly in certain suburbs of Sydney and Melbourne. So, it’s unlikely to be having much impact in areas where first home buyers buy.
Q: What exactly are international investors doing to the property market?
Foreign buyers basically add to property demand in areas where they operate, such as mid to upper end property in certain areas.
Q: What’s the purpose of the Australia’s Government’s move towards more stringent laws for foreign property investors?
The Australian Government recently announced moves to ensure that laws regarding the purchase of Australian property by foreign buyers are fully enforced with tougher penalties for any violations. The government took this action to respond to community concerns expressed in a Parliamentary inquiry which found these laws were often being flouted.
Q: How does the drop in the Australian dollar affect the property market?
The drop in the value of the Australian dollar since its high in 2011 makes Australian property - and indeed most things either in or from Australia - cheaper for foreign buyers. This is assuming they are in a country whose currency has gone up against the Australian dollar. This is likely to have added to foreign demand for Australian property.
Q: Any advice to SMSF investors considering investing in property?
Regardless of the ups and downs in the investment market, there are some simple tips to follow when you’re looking to purchase property:
- Be aware of your personal circumstances
- Think about what want to achieve
- Understand the risks you’re willing to take
- Consider seeking professional advice
About the author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.